National Bank Holdings Corporation — Q3 2019 Form 10-Q
Business context and reporting period. The company is a bank holding company operating primarily through NBH Bank, with 105 banking centers concentrated in Colorado and the greater Kansas City region. This unaudited filing covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are against December 31, 2018. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $51.8 | $49.8 | $155.4 | $146.8 |
| Provision for loan losses | $5.7 | $0.8 | $10.5 | $2.7 |
| Non-interest income | $24.8 | $18.1 | $62.5 | $55.5 |
| Non-interest expense | $43.8 | $44.4 | $134.6 | $146.5 |
| Income before taxes | $27.1 | $22.6 | $72.8 | $53.1 |
| Net income | $21.6 | $18.2 | $60.8 | $44.2 |
| Diluted earnings per share | $0.69 | $0.58 | $1.93 | $1.41 |
- Revenue and margins: Nine-month fully taxable-equivalent (FTE) net interest income increased 6.1% to $159.2 million. FTE net interest margin rose to 3.98% from 3.92% year over year for the nine-month period, but narrowed to 3.91% from 3.96% in Q3. Higher earning-asset yields were partly offset by higher funding costs. Nine-month mortgage banking income rose 29.7% to $32.0 million.
- Profitability and efficiency: Nine-month return on average assets was 1.40%, return on average tangible assets 1.45%, and FTE efficiency ratio 60.33%. These are company-reported measures; tangible and FTE measures are non-GAAP.
- Balance sheet: Total assets were $5.99 billion, up from $5.68 billion at year-end. Loans were $4.40 billion, up 7.6%; loans held for sale were $204.6 million, versus $48.1 million. Deposits were $4.73 billion, up 4.4%, with transaction deposits 77.5% of total deposits versus 76.2% at year-end. Shareholders’ equity was $753.3 million.
- Funding, liquidity and debt: Cash and cash equivalents were $116.9 million. Management reported on-balance-sheet liquidity of $436.6 million, including $319.7 million of unencumbered securities, down from $683.2 million at year-end. Repurchase agreements totaled $62.7 million and FHLB advances $303.9 million. The company reported $1.0 billion of total FHLB borrowing availability, of which $303.9 million was used. It expects available funding sources to provide adequate liquidity for at least 12 months.
- Cash flows: Net cash used in operating activities was $60.6 million for the nine months, compared with $23.1 million provided in 2018. The company attributed the operating cash-flow pattern in part to mortgage-loan originations and sales. Investing activities used $108.6 million; financing activities provided $176.6 million. Ending cash, cash equivalents and restricted cash were $126.9 million.
- Capital: At September 30, the consolidated Tier 1 leverage ratio was 10.9%, and both common equity Tier 1 and Tier 1 risk-based ratios were 12.9%. NBH Bank exceeded well-capitalized thresholds. Tangible common book value per share was $20.45, a non-GAAP measure.
Material changes versus comparable periods
- Nine-month net income increased to $60.8 million from $44.2 million. The prior-year period included $6.3 million after tax of Peoples acquisition costs; excluding those costs, 2018 net income was $50.5 million and diluted EPS was $1.61.
- Loan growth and higher originated-loan yields supported net interest income, while funding costs rose: nine-month cost of funds increased to 0.96% from 0.59%, and cost of deposits to 0.64% from 0.43%.
- Credit costs increased materially. The nine-month provision was $10.5 million versus $2.7 million, and net charge-offs were $7.4 million versus $0.2 million. A single previously acquired commercial loan accounted for $6.6 million of charge-offs and $6.6 million of the nine-month provision.
- Non-interest income increased 12.6% for the nine months, led by higher mortgage banking income. Non-interest expense declined 8.1%, reflecting $7.2 million of net gains on OREO sales and the absence of $8.0 million in prior-year acquisition costs, partly offset by higher salaries and benefits.
- Asset quality ratios improved in some respects: non-performing assets to loans and OREO fell to 0.76% from 0.85%; non-performing loans to total loans edged down to 0.58% from 0.60%. Non-accrual loans were $25.4 million, compared with $24.5 million at year-end.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management says it expects liquidity to be adequate for at least 12 months and highlights continued loan and deposit growth, operating efficiency, and digital investment as priorities.
- The company announced expansion into Utah, focused on commercial and business banking in Salt Lake City’s Wasatch Front. It planned to consolidate four Colorado and Kansas City banking centers in Q4 2019; a $0.9 million impairment charge was recorded in Q3, with an expected payback period of less than one year.
- Management reported three Federal Reserve rate cuts through October 2019 and noted that falling rates, competition, deposit-cost pressure, economic conditions, real-estate values, and the ability to sustain high-quality loan growth could affect results. Agriculture remained exposed to depressed commodity prices, though management described that portfolio as diversified.
- Management’s rate-sensitivity model showed projected net interest income increasing 5.96% under an immediate, sustained 200-basis-point rise, increasing 3.05% under a 100-basis-point rise, and declining 4.13% under a 100-basis-point fall. Actual outcomes may differ based on assumptions and management actions.
- Other items to monitor include the $7.2 million nine-month OREO sale gain, $0.9 million branch-consolidation impairment, the $6.6 million charge-off on the acquired commercial loan, and adoption of the expected-credit-loss standard (CECL), scheduled for January 1, 2020. The company was still evaluating CECL’s impact and said adoption could increase its allowance.
- Off-balance-sheet commitments included $801.1 million of loan commitments and $11.7 million of standby letters of credit. Mortgage-loan sale representations and warranties had a $2.5 million reserve. Management did not expect litigation or commitments to have a material adverse effect; it reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the elevated loan-loss provision and charge-offs remain concentrated in the identified acquired commercial loan or indicate broader credit deterioration.
- Whether loan growth, mortgage banking income, and deposit mix can offset rising funding costs and the Q3 decline in FTE net interest margin.
- How the reduced unencumbered-securities liquidity position and upcoming $731.1 million of time-deposit maturities are managed.
- The realized savings and service effects from the four planned branch consolidations, and progress and costs associated with the Utah expansion.
- The eventual CECL adoption impact on the allowance, retained earnings, capital, and reported credit costs.